China Faces Up to Summer Power Crunch

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"[China's] power-generating companies may plunge into red if state-set power tariff does not rise in tandem"

China's energy firms may struggle to meet growing demand for power this summer thanks to high coal prices and a drought in one of the country's main hydropower-generating regions, an industry association warned late on Apr 28.

The China Electricity Council said the current drought in southwest China and a 15% price hike in thermal coal may lead to power shortages in central and southwest China during peak hours this summer.

The situation highlights China's reliance on coal and hydroelectric power and provides support for analysts and campaigners who say it must urgently diversify its energy supply to include more nuclear power and renewables.

China's electricity consumption jumped 25% YOY to 969.5 billion kWh in 1Q10 and will rise by 9% YOY to 3.97 trillion kWh in 2010, according to the report. Total demand will continue to accelerate during 2011 as industrial production increases.

The warnings come at a torrid time for China's hydropower producers, who reportedly incurred 900M yuan in losses in the first two months of 2010 as production dipped. The performance marks a startling turnaround on the 1bn yuan profit recorded during the same period last year and highlights the growing impact droughts are having on the sector.

"Similarly, as coal prices rise, the country's power-generating companies may plunge into the red if the state-set power tariff does not rise in tandem," said Wang Zhixuan, secretary general of the China Electricity Council.

The report recommended a more flexible system where electricity prices are linked to coal price, easing the financial pressure on power companies.

The government last year approved a mechanism that sees electricity prices rise incrementally after coal prices have increased by more than 5% over a six-month period, but so far it has only been used twice to increase prices.

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